ASP and Hosted Service Providers

By Peter Lyle DeHaan, PhD

In simple terms, using a hosted service is like renting software. The Internet is a common element to hosted services. Typically software resides in a central server at the provider’s location and users access it via the Internet. According to Shane Green of Creative Entropy, the provider of SqueezeMeIn appointment-scheduling software, with hosted services, “There are no updates to worry about, no data backups to slow down your network, and no expensive hardware required to operate it. It is all handled by the provider. With the program running from one location it can be modified and new functions added easily. When the application is enhanced, there is no effort required by the call center to begin using the improved functions.” This is one of the chief advantages of using a hosted service.

Consider the analogy of renting an apartment versus buying a house. When you rent an apartment, you have a low initial cost (such as a security deposit or one or two month’s rent), no long-term commitment (month-to-month or a short-term lease), and flexibility (as your space requirements change you simply get a larger or smaller apartment). Contrast this to buying a house. With a house you have a greater initial cost (the down payment), a long-term commitment (a 30-year mortgage), and inflexibility (you can’t easily move or add space). Of course there are disadvantages to apartment renting and advantages to home ownership, but they don’t apply to this analogy!

In the same way, using a hosted service has a low initial cost, no long-term commitment, and is highly flexible as your needs and usage level change. In fact, many users of hosted services echo the sentiments of Earl Jarmanof LaBell Exchange: “We chose [Almond Hill’s] TurboSchedule for three reasons: simplicity, support, and affordability.” Stacy Polinsky of Tel-us Call Center, who also uses Turboscheduler, added, “You pay for the calendars as you need them, so you have no capital expense.”

Consider these four reasons to use a hosted service.

Try-It-Before-You-Buy: Think of this as an extended test drive. For a modest cost and minimal commitment you can assess a hosted service. If it works out, you can go ahead and buy the software or system for your office. However, if it is not what you expected, you simply cancel the service and move on, happy that you did not make a capital expenditure on something you are not likely to use.

Bootstrapping: A second scenario for using a hosted service is to build a client base and generate recurring revenues in a controlled way before buying any additional software or equipment. Once you have established a threshold of monthly revenue, you can then invest in the technology and bring it in-house. This is a low-risk way to pursue new markets and specialized niches that require services or capacities that you don’t have. This is feasible because you do not need to make a capital investment until after you have developed a client base and revenue stream to pay for the equipment. You can then determine when it is cost-effective to stop renting and buy, just as you can in our preceding apartment versus home example. Of course, some users will appreciate the utility, flexibility, and ease of the hosted service model so much that they will continue in that mode indefinitely.

Conserve Capital: The third reason to pursue a hosted service approach is to avoid making a capital investment, retaining funds for other purposes.

Occasional Use: The fourth justification is for a call center to obtain services that it needs on an intermittent basis or for the specific needs of one client. Since it would be difficult to justify the cost of an outright purchase in either case, using a hosted service is an ideal solution.

There are two business models for providing hosted services, though the line of distinction between the two is not always clear and can overlap. In fact, several of the vendors covered in this article fall into both categories.

Manufacturers: Often manufacturers want to provide low-cost options for prospective customers to try out products before they buy. While all of the preceding examples are objectives that the manufacturers pursue, the first two models (try-it-before-you-buy and bootstrapping) are their main objectives, though their pricing structure is viable when customers want to use their hosted services indefinitely.

ASP (application service provider): An ASP is a company whose primary business is to provide hosted services. Buying the software or equipment is generally not an option. So ASPs focus on recurring revenue (just like a teleservice company) and the last two usage scenarios (conserve capital and occasional use) are ideally suited for ASPs. The bootstrapping model is also of interest to ASPs, although in that scenario there is not an option to buy their software or equipment in the future.

“The ASP approach makes so much sense for Web-based applications,” said Ray Shaw, president of Business and Professional Exchange. “It also relieves our staff from the routine headaches and hassles of supporting an application internally.”